'EU companies can manage expected economic slowdown'

"Most European companies can manage expected economic slowdown over next two years fairly easily" (Moody's)Photo: Shutterstock

"Europe's slowing GDP growth is unlikely to result in significant stress for corporates' financial policies within the coming years," a report by Moody's Investors Service has said.

According to the US business and financial services company, euro area GDP growth will continue to drop from 2.5% in 2017 to 1.8% in 2019 and 1.6% in 2020.

"Most European companies can manage the expected economic slowdown over the next two years fairly easily," it said.

"The can pull a range of levers including reducing growth capital spending, curtailing opportunistic acquisitions and reducing dividend payments to preserve cash."

Figures about the 2015-2016 slump in commodity prices illustrate how companies can manage a downturn, Moody's added.

“Germany is perhaps the most significant market where growth will slow both in 2019 and 2020

Moody's

"The response by the mining and oil sectors was to slash capital spending, coupled with dividend cuts and scrip dividends, as well as significant asset sales."

In addition, Moody's explained that the high investment needs in the telecoms sector to prepare for fifth generation (5G) mobile technology show the limitations of capital spending flexibility.

"Although we believe that overall 5G capital spending will be largely credit neutral," it added.

According to Moody's, most rated European companies are domiciled in countries where the economic slowdown is expected to be moderate.

"Given the size of its economy, Germany is perhaps the most significant market where growth will slow both in 2019 and 2020," the report added.

Change in financial policies

Furthermore, "if a sharper downturn occurs, we could see a more significant change in financial policies, including asset sales and cutbacks in capital spending and dividends," said Richard Morawetz, senior credit officer at a Moody's, the author of the report.

"Ongoing Brexit uncertainty is weighing on business investment in the UK economy," Moody's stated.

"However, several companies responded to Brexit uncertainty by reducing investments or creating contingency plans to move their production outside the UK," it added.

"But at the same time, other companies have invested more heavily in supply chains and warehousing to avoid, or cope with, the potential effects of higher trade barriers post-Brexit."

Get the Luxembourg Times delivered to your inbox twice a day. Sign up for your free newsletters here.